Reverse mortgages can present a good opportunity for someone at or near retirement, but the product category comes with some pitfalls that potential borrowers should keep in mind before they think of engaging in a reverse mortgage transaction. This is according to financial columnist Liz Weston in a new article at CNBC.
“If you’re thinking about a reverse mortgage, be prepared to learn a lot about a complicated financial commitment,” Weston writes. “It may sound like the answer to your retirement cash prayers, but complexity and costs are among the factors to consider.”
After going through the approval and counseling processes, a potential borrower should keep in mind that any first-lien obligations on the home need to be satisfied, and proceeds will need to be applied to any remaining forward mortgage balance first.
“For loans insured by the federal government, the amount you can borrow depends on the age of the youngest borrower, current interest rates and either your home’s appraised value or the $765,600 maximum set by the Federal Housing Administration (FHA) — whichever is smaller,” Weston writes. “You don’t repay the lender until you permanently move out or die.”
While variable-rate Home Equity Conversion Mortgages (HECMs) are the most popular variations of the reverse mortgage, other proprietary options exist which can exceed the FHA lending limit, Weston explains.
There are two major advantages that come with a reverse mortgage, she says, and three notable disadvantages. Among the advantages, a borrower has the ability to tap the equity they’ve built up in their home without actually having to sell the property; and the title of the home remains with you contrary to popular belief.
Among the disadvantages, a borrower can face high upfront costs including an origination fee that could be higher than one found with a traditional mortgage; no one living with a borrower who is under the age of 62 can be listed as a borrower themselves; and less money may be left to surviving family members.
Among attributes that are not widely known about reverse mortgages, according to Weston, include protections put into place for non-borrowing spouses.
“Since 2015, people who want a reverse mortgage must undergo a financial assessment to demonstrate they can maintain the home and keep up with property taxes and other costs associated with ownership,” Weston writes. “You generally have up to a year after moving out to either sell or come up with the repayment, [Dr. Wade] Pfau says. The category of non-borrowing spouse, created in 2015, means the remaining spouse can remain in the house.”
Read the article at CNBC.
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